Valeo Expects European Car Market to Begin Rebound in 2013

PARIS – Valeo expects the European automotive sales collapse to bottom out during the year.

“There is a consensus that Europe will decline 4% this year,” CEO Jacques André Aschenbroich says, noting in January the market was down 8.7%, and further declines of that order are expected through the year’s first half before an improvement in the second half.

Valeo Vice President Francois Marion concurs, pointing out that if the year is to finish down just 4%, the second half must return to year-on-year balance with 2012.

“Maybe it won’t happen,” says Aschenbroich, but Valeo is ready for it.

At the same time, the French supplier expects global production increases to be only 1% this year, after a 2% rise in 2012.

When European production starts growing again, it will contribute to better cash flow, Chief Financial Officer Robert Charvier says. Free cash flow is the mantra in the French auto industry this year, mentioned as a goal by Renault, PSA Peugeot Citroen and Faurecia in their earlier financial press conferences.

Charvier says the auto industry needs cash to build factories in emerging markets, where growth is being pursued. In fact, Valeo’s free cash flow of €81 million ($107 million) in 2012 was before interest and dividends and buying out minority shareholders in a Chinese joint venture. The final net cash flow was negative by €180 million ($238 million), increasing Valeo’s debt.

Aschenbroich says the supplier’s balance sheet “is very solid, and we can continue to increase our debt,” which would enable it to make acquisitions in the areas of geographic expansion and carbon-dioxide-reduction technologies.

Valeo enjoyed higher sales in 2012 than 2011, up 8.2% to €11.8 billion ($15.6 billion). Operating profits rose 3% and amounted to 6.2% of sales. Aschenbroich says the goal in the next few years is to reach a 7% margin.

Sales as a Tier 1 supplier to auto makers rose 8%. But on a comparable basis, when exchange rates and other factors are considered, the increase was just 2%. Aftermarket sales gained 3% on a reported basis, but down 2% on a comparable basis, mainly because of the deteriorating market in Europe. Original equipment accounts for 84% of Valeo sales.

Nearly 50% of the supplier’s OE revenues come from Europe, down from 70% in 2008. German auto makers are the group’s largest customers, followed by the Asians, French and Americans.

The company is enthusiastic about its future, and managers propose raising the dividend 7%, which will distribute 30% of the 2012 profits to shareholders, up from 25% the past two years.

The increase “shows our confidence in the future,” Aschenbroich says.

The dividend hike contrasts with the decision of Faurecia, the other major supplier in France. Faurecia enjoyed a revenue increase of 7.3% to €17.4 billion ($23 billion) in 2012, but operating profit was just 3% of sales, down from 4% last year. Faurecia’s board last week recommended paying no dividend for 2012.

Valeo places its confidence in its record of innovation.

Aschenbroich says the company accepted orders for a record €15.8 billion ($20.9 billion) in 2012, and 28% of the products ordered were for new components not sold the year earlier.

He says profit margins on the new components are higher than on existing products. Asian auto makers accounted for 34% of the new orders and the Detroit Three for 22%, he notes, indicating those two regions will grow in relative importance.

In 2012, Asians represented 28% of Valeo’s business and the Americans, 18%.

In 2013, the supplier expects sales to increase 7% in China, 15% in North America and 17% in India.

Capital investment for last year totaled €857 million ($1.1 billion), including €635 million ($862 million) for machinery and property. In China, for example, Valeo is adding four factories this year to the 22 in place at the end of 2012.

The parts maker says its supply base is in good shape, with red flags raised on just 10 of its suppliers globally. “We are not like 2009,” says Aschenbroich, when Valeo had as many as 140 suppliers in difficulty.

“There is stability in Europe. We are resisting well,” he says, especially because production by the German auto makers has been good.

But thanks to increased sales to Detroit auto makers and decreasing sales to the French, the Detroit Three will account for more Valeo revenue in 2013 than the two French auto makers.